Italy. New restrictions on exchange and stock dealings. Rise of quotations. Speculative mania. Rush of new issues

«The Economist», 14 marzo 1925, pp. 502-503

Turin, March 4

On Saturday, February 28th, after the closing of Stock Exchanges, a Royal decree suddenly introduced new stringent regulations on speculative dealings in securities and on foreign exchange transactions. Brokers are thereby prohibited from dealing personally in foreign exchanges; they can act only as brokers, and not as jobbers. All dealings are to be registered, indicating names of buyers and sellers, price, date, details of the bills of exchange dealt with, & c. The State Institute for foreign exchanges has the right to require from all banks and exchange dealers figures of their credits in foreign exchanges, and of their debts in lire towards foreign correspondents. The Institute can require daily communications of all buying and selling transactions in foreign exchanges. The immediate cause of the decree, which savours of war legislation, is the drift of the lira towards lower gold quotations.

The average gold value of the lira for the year 1920 was 25.6 per cent. of the value; it fell to 22.2 per cent. for 1921, rose in 1922 to 24.6 per cent., but again declined to 23.8 per cent. in 1923. At the end of 1924 the percentage gold value was 22.5 per cent. At the end of January, 1925, the lira sank to 21.5 per cent. level; at the end of February to 20.9 per cent. Fears are current that too many Italian capitalists are making investments abroad.

Up to the present the emigration of capital is not noticeable so far as the average saver is concerned; it seems, indeed, to be limited to non-remittance to Italy of the proceeds of sales of Italian goods made in foreign countries. Italian business men and exporters are accumulating dollar or sterling credits at New York, London, Zurich, & c. It is impossible to gauge the extent of the accumulation, but the Treasury evidently desires to keep an eye on the movement.

The decree also regulates future dealings in Stock Exchange securities. No dealing in futures can be executed by brokers if the principal does not previously pay down in cash 25 per cent. of the price of the security which he intends to buy. It will not be an easy task to put this new regulation into practice, but its aim is clear. Speculation is rampant on the Italian bourses. The average Bachìs number index of the quotations of certain important variable dividend securities (basis equals 100 for December, 1918) was 64 for 1922, 77 for 1923, 110.7 for 1924. But 1924 closed with the maximum of 130, and at the end of January the figure touched 131.2. At the end of February the index will be, when calculated, several points higher still. Individual rises are much more pronounced than these averages, all the usual characteristics of Stock Exchange speculative mania being present. The order to pay down 25 per cent. of the purchase price aims at eliminating from the markets all principals without money or credit who buy securities at random in parcels of thousands at a time in the hope of covering by sales at rising prices. The speculative mania was extending so alarmingly that the Committee of the Milan Stock Exchange was obliged to create a ticket of admission, a thing unheard of in Italy, in the hope of diminishing the crowd. Increasing stringency in the carry-over rates was scarcely effective.

Whereas the official rate of discount was not changed from the old 5.50 per cent., carry-over rates, which were 6.50 to 7 per cent. in January, 1924, were put up to 7.50-8.50 per cent. in January and February, 1925; but the hopes of great gains on price differences ran so high that speculators disregarded the interest charges. Second-rate operators are known to have paid prolongation rates of 5 to 10 per cent. monthly. A restriction of credit against these extravagances was long overdue.

The speculative mania is abetted by the continuous increases of capital by old companies and flotation of new securities. The capital issued by joint-stock companies increased in 1922 by 1,044 millions lire, in 1923 by 2,128 millions lire, in 1924 by 4,839.5 millions lire, and in January, 1925, by 627 millions lire. Like a snowball, increases are doubling themselves every year. The depreciation of the lira goes far to explain this movement. Circulating capital is needed in greater quantity; machines and buildings are most costly; old capital ought to be re-valued in order to bring it in harmony with modern values. Re-valuation takes the limping form of watering, i.e., introduction of new capital in depreciated lire side by side with old capital in old gold lire. Dividends, which would have had an ominous appearance of 30 or 50 per cent. on gold capital, are thus reduced to the more manageable and democratic percentages of 10 per cent. on watered capital. No wonder that in such a transient and uncertain market speculation is rampant. It will be interesting to observe if the 25 per cent. decree will be effective in persuading operators to be more prudent. In the meantime, all bourse operators are alarmed, for they say that it is impossible to make principals anticipate payment of 25 per cent. of a sum due only on the settlement day at the end of the month. Stock Exchanges were, therefore, in the first two days of the new regime almost idle, as operators are on strike against the new regulations, in the hope that Government may be induced to change the new regulation, which they say is unworkable.